The U.S. Supreme Court’s recent decision in Kokesh v. SEC imposes a five-year statute of limitations on agency-sought disgorgement in SEC enforcement actions, resolving a Circuit split and definitively categorizing disgorgement as a statutory “penalty” under 28 U.S.C. § 2462. That statute applies a five-year limitations period to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.”

The Court’s decision now precludes the SEC from seeking disgorgement of ill-gotten gains in enforcement actions where the fraud or misappropriation occurred more than five years before the date on which the SEC files its complaint. Prior to the Court’s decision in Kokesh, the Commission could seek disgorgement judgments for alleged violations occurring many years prior to filing a complaint.

The U.S. IPO market began 2017 with a solid start, with 25 IPOs raising nearly $10 billion in the first quarter and another 31 IPOs in the second quarter through May 15. We have a number of U.S. and non-U.S. clients moving ahead on U.S. IPO plans in 2017. Will the IPO market in the United States experience a renaissance? While IPOs in the U.S. fell off the map after a slowdown in 2015, the market looks to be bouncing back.

The 25 IPOs in Q1 2017 differs drastically from 2016’s first quarter, which had just 8 IPOs raising $0.7 billion. First quarter IPO activity in 2017 also reflected broad sector diversification, with energy, technology, and healthcare deals topping the lists. Tech raised the greatest amount of money thanks to the long-awaited Snap IPO of $3.4 billion, the largest IPO of a U.S. tech company since Facebook. Yet, the energy sector had the highest number of IPOs, with five companies going public last quarter—more than the total number of energy IPOs in all of 2016. [1]

Chart A: U.S. IPO Activity (2017 data through May 15, 2017)

These signs of life come after a drop off in IPOs in 2015 and 2016, a steep fall after the IPO boom of 2014. The U.S. IPO market has been slow to regain strength after the tech boom of the late 1990s, facing a particularly major blow after the 2008 financial crisis. With only 31 IPOs completed in 2008, the market had its lowest number of IPOs in over the last 20 years. 2014 marked the most active year for IPOs in the U.S. since 2000, with 275 IPOs and $86.6 billion raised. Market instability in the second half of 2015 and early 2016 hurt the U.S. IPO market, but I believe that the solid start to 2017 indicates a possible renaissance of companies going public. If the momentum carries into the following quarters, I believe we could see a steady revival of the IPO market from 2017 into the next few years. Still, there are a number of bigger companies that have continued to raise private capital and hold off on an IPO, including Airbnb, Lyft, and Houzz. Airbnb is leading the pack with $1 billion raised in its latest round of funding, while Lyft just closed a $600 million round. [2]

Chart B: Key US IPO Statistics

IPO Statistics for the First Quarter of 2017:

25 U.S. IPOs and $9.9 billion raised. This compares to 8 IPOs and $0.7 billion raised in the first quarter of 2016.

Average IPO performance in 1Q 2017: 11% gain.

Snap raised $3.4 billion in the largest US IPO since Alibaba in 2014, and the largest IPO of a US tech company since Facebook in 2012.

The quarter’s second-largest IPO, Blackstone’s $1.5 billion offering of home rental REIT Initiation Homes, was also a larger deal than any IPO in 2016.

Nearly half of all the IPOs in the first quarter were backed by private equity, beating venture capital for the first time since 2013.

The median deal size for the first quarter was $190 million, the largest it has been in years and double the full-year 2016 median.

Energy led the quarter in terms of deal count, with 5 IPOs. The Keane Group had the largest deal, raising $584.7 million.

Through May 15, 2017, there have been 56 U.S. IPOs, a 154.5% increase from the same date last year.

Global IPO issuance totaled $24.2 billion in the first quarter of 2017, with 70 deals closed. Asia Pacific led the market with 41% share of all proceeds raised, while North America took a close second with 39% share of proceeds.

[1]Please note that there will be some variance in the statistics for IPOs generally. This is because most data sets exclude extremely small initial public offerings and uniquely structured offerings that don’t match up with the more commonly understood public offering for operating companies. The IPO data in this post is based on information from Renaissance Capital- manager of IPO-focused ETFs- www.renaissancecapital.com.

Our partner Pamela B. Greene was recently quoted in a Boston Globe article focusing on a local company’s use of Regulation A+ (or “Reg A+”) as a new way to raise capital, and the benefits and risks that may be associated with this kind of offering. The rules allowing Regulation A+ were adopted by the SEC in March 2015, as mandated by the Jumpstart Our Business Startups (JOBS) Act, and are designed to facilitate smaller companies’ access to capital. The rules enable smaller companies to offer and sell up to $50 million of securities in a 12-month period, subject to eligibility, disclosure and reporting requirements. A Cambridge, MA medical robotics company called Myomo is planning to complete an offering using this method. The article in which Pam is quoted can be found here.

Snap Inc., which debuted on the New York Stock Exchange (NYSE) on March 2nd, was the largest tech IPO since Alibaba went public in 2014. Initially priced at $17 per share, the share price jumped to more than $24 by the end of the first trading day, raising $3.4 billion and beating market expectations.

Beyond the magnitude of the offering and its implications for the broader deal pipeline, Snap’s IPO has raised interesting governance issues around its non-voting shares, which the SEC’s Investor Advisory Committee (IAC)[1] tackled on March 9th at its quarterly meeting. The IAC’s discussion centered on Snap’s three-tiered capital structure: Class C shares with 10 votes per share for founders Evan Spiegel and Bobby Murphy, Class B shares with one vote per share for pre-IPO VC investors and other insiders, and Class A shares withno voting rights for public investors. Companies like Facebook and Google have employed similar structures in the past; in fact, a recent study by Institutional Shareholder Services (ISS) noted that dual- and multi-class capital configurations are common, especially in the technology sector.[2] However, the notion of affording no voting rights whatsoever to public investors is unprecedented.

SNAP RAISES CONCERNS FROM INVESTOR GROUPS AROUND GOVERNANCE CONTROLS

Some have expressed concern that the issuance of no-vote shares weakens corporate governance controls. The same ISS study referenced above found that “controlled companies” – those with multi-class or unequal voting rights like Snap – tend to underperform relative to their non-controlled peers in several key areas of assessment including shareholder returns, revenue growth, and return on equity. The most critical investors’ rights advocates argue that Snap’s no-vote share class will be disastrous for the company’s shareholders who will be left without a say while Snap is given the go-ahead to operate as a public company without being subject to traditional public company voting and disclosure requirements.[3]

Others who were not on the IAC’s meeting agenda are less fatalistic in their assessment of Snap’s potential impact on shareholder rights. Looking at industry trends, some of the most successful public technology companies have concentrated voting power among the company’s founders, and shareholders appear to have benefitted (or at least not to have been disadvantaged) as a result.[4] Facebook and Alphabet are prime examples. Others maintain that Snap is an anomaly – as a tech “unicorn” (one of a select group of private ventures valued at more than $1 billion), Snap is able by virtue of its rarefied status to issue no-vote shares whereas smaller-cap or less prestigious companies likely could not. As long as Snap continues to prosper, so will its Class A holders, even without a direct say in the company’s decision making.

SNAP’S DISCLOSURE OBLIGATIONS TO CLASS A HOLDERS

Beyond the general governance concerns, Snap’s IPO has also generated discussion around the company’s disclosure obligations. Are Snap’s no-vote shares entitled to the same degree of disclosure as voting shares? Technically no, though Snap has indicated in its SEC filings that it intends to afford Class A holders the same degree of transparency as those with voting rights.[5] According to Snap’s prospectus, the company plans to invite the Class A holders to attend the annual meeting and to submit questions to the management team. Snap simultaneously acknowledges that its Class A shares are its only class of stock registered under Section 12 of the Exchange Act, and therefore Snap is not required to file a proxy statement unless a vote of Class A holders is required by applicable law. The company promises, “[W]e will provide holders of our Class A common stock … any information that we provide generally to the holders of our Class B common stock and Class C common stock, including proxy statements, information statements, annual reports, and other information and reports.”[6]

Snap caveats that promise in several important ways. First, if the company doesn’t deliver proxy statements or information statements to Class B holders, then it will not do so to Class A holders – that goes without saying. Second, Snap will be still obligated to comply with the ongoing periodic and current disclosure requirements of the Exchange Act, including Form 8-K, which may be filed up to four business days after a material event and which, by its nature, is less detailed and more open ended in terms of content requirements than a proxy statement. This means that Snap’s disclosures on executive compensation and related matters may include less information than would otherwise be required by a proxy statement. Lastly, because Snap is not bound by the proxy filing requirements, any filing the company does make may not contain all the information that would otherwise be required of a public company with voting shares. Class A holders will essentially be reliant on the company’s annual, quarterly and current reports, without the ability to refer to proxy statements for information on, for example, its compliance with proxy access rules. As a side note, Snap will not be required to comply with the Dodd-Frank Act’s “say-on-pay” and “say-on-frequency” rules, by virtue of its status – for now – as an emerging growth company under the JOBS Act.[7]

OBLIGATIONS OF NYSE AND OTHER NATIONAL EXCHANGES

Testifying before the IAC, Ken Bertsch of the Council of Institutional Investors (CII) questioned what Snap’s IPO means for institutional asset owners, which hold the majority of publicly traded securities in the U.S.[8] He criticized the NYSE for being “asleep at the wheel” by allowing Snap to list a non-voting class of securities on the exchange, which he argued were more akin to preferred stock or derivatives. Aside from Snap’s ability to trade on the NYSE, Bertsch asserted that the company should not be permitted to participate in public company stock indices. Under his theory, an investment in an index fund pegged to the S&P or any other index carries with it certain expectations regarding the underlying disclosures of listed companies, and Snap’s no-vote shares run afoul of those expectations by adding a layer of complexity that will not be adequately reflected in the price.

Given the SEC’s regulatory power over national securities exchanges like the NYSE, a number of related questions emerge: How does allowing Snap to list on NYSE impact exchanges outside the U.S. where listing requirements are generally less onerous? Should the SEC be concerned about a potential race-to-the-bottom amongst non-U.S. exchanges?[9] How should the SEC balance investor protection directives against the desire to entice private companies to go public?

None of these questions were answered on March 9th. At most, the testimony amounted to a call by investor groups to revisit the rules surroundings multi-class common structures listed on U.S.-domestic exchanges in light of Snap and the potential for other companies to replicate its offering structure. Those who are skeptical of CII’s argument with respect to index funds will note that Snap is still subject to ‘34 Act reporting requirements, which generally puts it on par with other companies listed in the index (proxy rules excepted). Certainly, fewer or limited disclosures are of concern to any investor who wants to ensure the share price accurately reflects the totality of information available. Those concerns may be better directed at deregulatory efforts generally, rather than at Snap, which continues – at least as of this writing – to trade above its initial IPO price.

CONCLUSION

It’s unclear whether the Commission will address the topic of no-vote shares again in the near term, especially given its change in leadership and priorities. All parties would benefit to wait and see how Snap performs over time and whether the company endeavors in good faith to provide its Class A holders with a degree of transparency that resembles that of more traditional shareholders.

[1] The IAC is a mandate under Dodd-Frank, set up to advise the SEC on various regulations affecting investors. Here’s a link to the agenda, as posted on the IAC’s website: https://www.sec.gov/spotlight/investor-advisory-committee-2012/iac030917-agenda.htm.

Public companies will soon be required to include an active hyperlink to each exhibit to all registration statements filed under the Securities Act of 1933, as amended, and all periodic and current reports filed under the Securities Exchange Act of 1934, as amended, filed on or after September 1, 2017.

Under Regulation S-K Item 601, public companies are required to file their material agreements, certificates of incorporation, bylaws and other specified documents as exhibits to their SEC filings. Exhibits that are identified in the exhibit index to the filing may be attached to the filing or, in the case of previously-filed exhibits, may be incorporated by reference from the previous filing to the extent permitted by the SEC’s rules and forms. Currently, an investor seeking access to an exhibit that is incorporated by reference into a filing must first determine where the exhibit is located by reviewing the exhibit index and then search for and locate the filing which contains the exhibit, which can be time-consuming and cumbersome. The exhibit hyperlink rule, therefore, is intended to facilitate easier access to these exhibits for investors and other users of the information.

Key points to note about the exhibit hyperlink rule:

An active hyperlink will be required for each exhibit identified in the exhibit index of the filing, including exhibits that are incorporated by reference from a prior filing and exhibits that are attached to the new filing. The hyperlink rule, however, does not require the hyperlinking of any XBRL exhibits or exhibits filed with Form ABS-EE. The SEC also decided not to require companies to refile electronically any exhibits previously filed only in paper.

The requirement to include exhibit hyperlinks applies to Securities Act registration statements, including all pre-effective amendments; Exchange Act periodic and current reports; registration statements on Form F-10 and annual reports on Form 20-F; and does not apply to other forms under the multi-jurisdictional disclosure system used by certain Canadian issuers or to Form 6-K.

The exhibit hyperlink rule is effective for filings submitted on or after September 1, 2017. Smaller reporting companies or non-accelerated filers that submit filings in ASCII format will be required to file their registration statements and periodic reports that are subject to exhibit filing requirements in HTML format and to comply with the exhibit hyperlink rule for filings submitted on or after September 1, 2018. The hyperlink rule does not apply to exhibits filed in paper pursuant to a temporary or continuing hardship exemption under Rules 201 or 202 of Regulation S-T or pursuant to Rule 311 of Regulation S-T.

If a filing contains an inaccurate exhibit hyperlink, the inaccurate hyperlink alone would not render the filing materially deficient nor affect the company’s eligibility to use Form S-3. However, the company must correct a nonfunctioning or inaccurate hyperlink, in the case of a registration statement that is not yet effective, by filing a pre-effective amendment to the registration statement or, in the case of a registration statement that is effective or an Exchange Act report, by correcting the hyperlink in the next Exchange Act periodic report that requires or includes an exhibit pursuant to Item 601 of Regulation S-K (or, in the case of a foreign private issuer, pursuant to Form 20-F or Form F-10).

The IPO market in 2016 was abysmal, especially for the life sciences sector. Annual IPO proceeds fell to the lowest level since 2003. The IPO market forecast for 2017 is uncertain. Some life sciences companies that went public during the last IPO wave ending in 2015 still have plenty of cash yet they have “hit the wall” clinically, making them “fallen angels”. In this environment, the “fallen angel” reverse merger has emerged as an attractive way for many promising life sciences companies to raise capital and to go public.

In response to these trends, my colleague Matt Gardella and I have assembled a stellar panel of experts for a discussion about fallen angel reverse mergers as an alternative to the traditional IPO. Please join us at Mintz Levin on Monday, March 6th starting at 3:00 PM to learn whether this important approach to going public might be right for your company. Our panel will provide the perspectives of the deal lawyer, the private company, the fallen angel, the investor, the investment banker, and the Nasdaq listing consultant. You will gain insights into the key issues involved in evaluating a fallen angel reverse merger strategy, negotiating a deal, smoothly completing a transaction, and being ready for life as a public company.

Please note: This panel is an in-person event at our Boston offices with a networking period afterwards.

SEC Acting Chairman Michael S. Piwowar issued a public statement on February 6, 2017 requesting input on any unexpected challenges that companies have experienced as they prepare for compliance with the CEO pay ratio rule, which will become required disclosure in public company 2018 proxy statements. Piwowar also directed SEC staff to “reconsider the implementation of the rule” based on comments submitted.

This public statement and request for comments is a first step in considering changes to the rule, as part of the Republican Party’s effort to modify or roll back certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd Frank). Any SEC modifications to the CEO pay ratio rule would take time to implement and may be challenged. The easiest route to prevent its implementation would be for Congress to repeal this provision of Dodd Frank.

A recent First Circuit decision raises the pleading bar for plaintiffs asserting violations of Section 11 of the Securities Act. Only would-be plaintiffs who acquired a security that is the direct subject of a prospectus and registration statement are entitled to sue under Section 11. That right to sue is limited to plaintiffs who either purchased their shares directly in the offering, or who otherwise can trace their shares back to the relevant offering. This has been referred to as the “traceability” requirement. Until now, Section 11 plaintiffs have generally sought to establish standing by pleading a simple statement to the effect that they “purchased shares of stock pursuant and/or traceable to the offering.” For companies whose stock is all traceable to a single offering, this pleading burden presents little burden, as all shares self-evidently derive from the offering. But when stock has been issued in multiple offerings, a plaintiff has to plead that his or her shares were issued under the allegedly false or misleading registration statement, and not some other registration statement.

The Securities and Exchange Commission recently issued proposed amendments to increase the financial thresholds in the definition of a “smaller reporting company” that, if adopted, will increase the number of issuers that qualify as smaller reporting companies and thereby would benefit from the scaled disclosure requirements. The proposed amendments are intended to promote capital formation and reduce compliance costs for smaller issuers, while maintaining investor protections.

Mintz Levin’s Securities Practice

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